Federal Reserve Chairman Jerome Powell delivered a tough message on Friday. The Fed is likely to impose even more significant rate hikes in the coming months and remains resolutely focused on keeping inflation at a 40-year high.
Powell also made it clearer than ever that continued credit tightening by the Fed would hurt many households and businesses as higher interest rates could further slow the economy and lead to job losses. I warned you.
“These are the unfortunate costs of keeping inflation under control,” he said in a high-profile speech at the Fed’s annual economic symposium in Jackson Hole. “But failure to restore price stability would mean far greater pain.”
Investors had hoped for a signal that the Fed could soon ease rate hikes later this year if inflation showed signs of easing further. But the Fed chairman has indicated that that time may not be near.
After raising key short-term rates by three-quarters of a percentage point at each of the last two meetings, Powell said the Fed “will slow down at some point,” as part of the fastest series of rate hikes since the early 1980s. It’s possible,” he said. – suggests that such a slowdown is not near.
Powell said the magnitude of the Fed’s rate hike at its next meeting in late September would depend on inflation and employment data, whether it’s half a percentage point or three-quarters of a percentage point. However, a hike of either magnitude would exceed the Fed’s previous 1/4-point rate hike, reflecting just how severe inflation has become.
The Fed chairman said the decline in inflation reported in July was “welcome,” but that “a month of improvement is something the committee needs to see before it can be confident that inflation is declining.” It’s far from it,” he said.
He pointed out that the history of high inflation in the 1970s, when central banks tried to counter high prices with only intermittent rate hikes, shows that the Fed must remain focused.
“Historical records strongly warn against premature rate cuts,” he said. “We have to keep doing it until the job is done.”
Powell’s speech will be the marquee event for the Fed’s annual economic symposium in Jackson Hole, the first in-person central bank meeting since 2019 after being virtualized for two years during the COVID-19 pandemic. I was.
Since March, the Fed has hiked interest rates at its fastest pace in decades to keep inflation in check, and soaring costs of food, gas, rent and other essentials are hurting household budgets. , raised the benchmark interest rate by 2% in just four meetings, to a range of 2.25% to 2.5%.
These hikes have increased the cost of mortgages, auto loans and other consumer and business borrowings. Home sales have plummeted since the Fed first signaled it would raise borrowing costs.
Fed policymakers said in June they expected the key rate to remain in the range of 3.25% to 3.5% through the end of 2022, with a further increase to 3.75% to 4% next year. If interest rates hit projected levels at the end of the year, they would be at their highest since 2008.
Powell believes it can produce a risky outcome that slows the economy enough to ease inflationary pressures but not enough to trigger a recession.
His job is complicated by cloudy conditions in the economy, which on Thursday said the economy contracted at an annual rate of 0.6% in the April-June period. This is the second consecutive quarter of contraction.
At the same time, inflation remains very high, although there are signs of easing, particularly in the form of lower gasoline prices.
At the July meeting, Fed policymakers expressed two competing concerns, highlighting their delicate task.
Officials, who were not named, prioritized fighting inflation, according to the minutes of that meeting. Still, some officials said the Fed risked raising borrowing costs more than necessary, sending the economy into recession. If inflation approaches the Fed’s 2% target and the economy weakens further, reconciling these differing views could become difficult.
At last year’s Jackson Hole Symposium, Fed Chair Powell gave five reasons why he thinks inflation will be “temporary.” But instead it has persisted, and many economists point out that those statements are not old enough.
Powell indirectly acknowledged that history in his opening remarks on Friday, saying: “Past Jackson Hole meetings have discussed a wide range of topics, including the ever-changing structure of the economy and the challenges of implementing monetary policy. He said.
“Today my statements are shorter, my focus is narrower, and my messages are more direct.”